Venture Capital - A Challenge For Life Science Investors
Imagine you’re a venture capital group that invests in both life science companies (biotechnology & pharmaceuticals) and software companies. If you’re successful in both areas, the chances are that the software side of your business is outperforming the life sciences side of your business. Which begs the question: can life science companies ever deliver the kind of returns, on the kinds of short timescales, that software companies can?
Let’s take the recent example of the “software as a service” company - YouTube. YouTube was founded in Februrary 2005, and at that time had a value of zero dollars. It closed its Series A financing of $3.5M was in November 2005. The company was acquired just 11 months later at a price of $1.65B, with total investments over the lifetime of the company rumoured to be less than $40M.
Of course, YouTube doesn’t have a business model. It doesn’t have the most eyeballs when it comes to watching videos on-line - more people watch video on Yahoo! and MySpace than they do on YouTube. And YouTube has loads of major IP problems from illegally hosting copyrighted content that’s owned by massive litigious corporations. So, what did they do? Well, what they did was to make it easy for people to upload videos to the Net, and easy for people search for, successfully find, and watch videos that they were interested in. And they did a great job - both the search and the video playback “just works”. And because of that, they gained huge mind-share.
So, why did Google acquire YouTube? Simple - because Google’s own attempt at video search was failing; and video search is going to be big in the future. Acquiring YouTube is a quick way to solve the video search problem for people at Google - and they clearly didn’t mind what they paid, because the sums of money involved are, in truth, in the noise for Google.
Not every business that could acquire such companies, will e.g. for some reason, Microsoft keeps passing on these deals - probably because of the so-called NIH (not invented here) syndrome.
So, YouTube is going to be a massive, fast growing, success for Google. On-line video is only in its infancy - it’s not until you get greater than 8Mbps Internet connections that you can really start to enjoy on-demand video. And not everyone is on an 8Mbit connection yet.
Today, on the other hand, it’s difficult to imagine VC-backed life sciences companies creating this much value, on these kind of time-scales. Why? Because life sciences companies that don’t have business models, and have many IP problems almost never get financed. The life sciences companies that do get financed tend to have proven business models - such as development of new drugs - which takes years.
So - the challenge for VCs investing in the Life Sciences is: how can you create a billion dollar life sciences company in around a year from the Series A?
Remember, you won’t do it with a classical drug development play - it just takes too long to build value in a company where the valuation is based on products. So, how can it be done? Well, there’s just one thing you need to do - create a company that people at a big Pharmaceutical or Biotech company really want to acquire. Remember, in the same way that $1B+ is in the noise for Google, paying $1B for a biotech is in the noise fo a big Pharma/Biotech company. Such a startup really doesn’t need a business model. It doesn’t need to have all its IP ducks lined up. It does, however, need to be hugely exciting; and have the potental to change the rules for some major, key aspect of drug discovery and development where the acquirer has a problem.
Marc Dencker wrote:
I agree with your conclusion but I dont understand what a biotech can develop in a year that a large pharma really wants to acquire?
it feels to me that the only way to do that is to take spin-offs from large pharmas. Very small teams of people with an idea that has been rejected by the pharma and they go off an do it. Make some progress in a year to show the pharma they were wrong. I have trouble understanding how they would get to a 1B valuation though
Posted 25 Nov 2006 at 5:23 pm ¶
simon wrote:
I’m not saying that it’s easy. And, to be honest, it might not even be possible. However, it’s certainly possible to do in in a period of three years.
As for spin-outs from big pharma companies… I’d say the sweet spot for those wouldn’t really fit into the start-up category. That’s because the culture inside big pharma is usually not right for a true start-up. So, the sweet-spot for a big pharma spin-out, for my money, is taking a bunch of clinical stage products (with products at the right stages of clinical development) out of the company, and create it with a substantial mezzanine financing. That is, you’d want to be in a position to IPO the pharma spin-out about a year after creating the company.
I suspect the way to go from zero, to a billion dollar valuation in less than three years, would have to include the development of a new drug discovery platform technology. No easy to do - you’d have to be very smart about how you go about demonstrating value, and assemble a team that truly had the ability to execute.
Posted 25 Nov 2006 at 11:32 pm ¶